Commission Consults on More Open and Efficient Defence Procurement - Frequently Asked Questions

(Source: European Commission; issued Sept. 23, 2004)

Why is the Commission launching a consultation on defence procurement markets?

The Green Paper is one of a series of initiatives launched by the Commission to gradually establish a real European defence market, with common rules applying to all Member States but adapted to the special nature of the sector. Such a market would complement the work Member States are taking forward under the European Security and Defence Policy (ESDP), identifying the military capacity that will be necessary in the future and working together to meet that need. Competition within the EU, the competitiveness of European industry and the efficiency of public spending could all be improved. Current fragmented national markets are no longer sustainable, given the budgetary situation of Member States, ever faster increases in research and development costs for major defence programmes and the competitive advantages currently enjoyed by non-European industries.

That is why the Commission continues to take forward the initiatives announced in its March 2003 Communication “Towards a European Union Defence Equipment Policy”, which has an impact on a range of policy areas, notably in the fields of standardisation, research and markets.

The Green Paper opens a debate on the need to take EU-level initiatives on the regulation of defence procurement markets. The political context makes this debate all the more necessary. Indeed, the European Parliament has invited the Commission to publish a Communication. The Thessaloniki European Council and the European Convention instigated the recent establishment of a European Defence Agency responsible for progress on coordinating military capacity and for contributing to a competitive European defence market. This Agency will base its work on progress already made by Member States at inter-governmental level within the Letter of Intent Framework Agreement (LOI), the Joint Organisation for Armaments Cooperation (OCCAR) and the Western European Armaments Group (WEAG).

The debate prompted by the Green Paper is a logical follow-up to these advances.

What makes procurement markets in the defence sector special?

Public procurement Directives are applicable in principle to all sectors, including defence.

However, certain defence products are very specific in nature. States need them to protect their sovereignty and to conduct their foreign and security policies. Consequently, defence industries are strategic and governments play a crucial role as customers, sponsors and regulators. Given the political and military sensitivity of defence systems, secrecy, confidentiality and security of supply are particularly important.

Exceptions to general public procurement rules are therefore provided for in the EC Treaty, as it is not always possible to use for defence contracts the procedures set down in the Directives - for example, open tendering processes based on publication in the Official Journal of the European Union.

How does the Green Paper address the special nature of defence procurement markets?

The Green Paper opens a debate on how to improve cross-border competition in certain types of defence procurement. First, it assesses how the Commission might clarify in a Communication when defence contracts can be exempted on national security grounds, covered in Article 296 of the EC Treaty, from general Treaty requirements on the free movement of goods and services and therefore from the existing procurement Directives. In addition, the Green Paper asks stakeholders if the Commission should propose a Directive coordinating procedures for defence procurement, in cases where the exemption is not applicable, or where Member States choose not to take advantage of it. For such contracts, the Directive would introduce new flexible rules, taking full account of the special nature of the sector.

Are defence markets currently totally closed?

Member States’ combined military expenditure is considerable but it remains mainly split into national markets.

However, some progress has been made as a result of the increase in European armaments cooperation but even in that context, cross-border procurement remains limited by the principle of “juste retour” which means that work is split up between suppliers based on purely national industrial policy criteria.

As far as national procurement decisions are concerned, the degree of openness of defence markets varies greatly between Member States. Since information on defence markets is fragmented and incomplete, it is not possible to present a comprehensive picture. In general, countries which do not themselves produce military supplies on a large scale naturally have more open defence markets than those who do. In general, however, the share of contracts awarded by competitive procedure is still low and national suppliers still tend to be awarded most of the contracts.

Member States have, within the Western European Armaments Group (WEAG) framework, agreed on a set of principles to foster trans-border competition. These commitments, however, are not legally binding and have therefore had only limited success.

What would be the impact of more open defence procurement in terms of competitiveness?

As the Commission indicated in its March 2003 Communication “Towards an EU defence equipment market”, the EU needs a competitive defence and technological base to realise the full potential of the ESDP. Such a competitive base, given the large size of the sector, is also crucial to economic growth and to the overall competitiveness of the European economy and will be a factor in achieving the goals set out in the Lisbon strategy.

The currently fragmented regulatory framework often makes it difficult for companies to adjust to the different national approaches within the EU.

The advantages of a more open European defence market, adapted to the specific nature of the sector, are generally acknowledged. It would allow companies, especially SMEs, to tender more easily in other EU Member States and thus widen their access to business opportunities within a much larger “home” market. Longer production runs would allow economies of scale. This, in turn, would help to reduce costs and lead to lower prices. The final beneficiary of that would be the taxpayer. Everybody in Europe should in the end also benefit from the greater economic prosperity created by the improved global competitiveness of European industry, especially given the growing dual use potential of technologies (military and civilian). A more open market would also boost industrial restructuring across national boundaries to reduce duplication.

What is defence procurement as an estimated proportion of EU GDP?

According to Eurostat estimates, total defence expenditure by the EU 15 Member States in 2002 represented € 156 billion or 1.7 % of EU GDP. For the enlarged EU, the corresponding figure is about € 160 billion. According to NATO figures also from 2002, defence equipment expenditure (acquisitions and research and development) represented € 26 billion, and 0.3% of the GDP, of those EU 15 Member States which are also NATO members.

Which Member States have the largest defence industries?

The most important arms producing countries with the highest turnover in the EU are: UK, France, Germany, Italy, Sweden and Spain. They represent approximately 90% of defence equipment production in the EU-25.

These countries also represent 80% of total EU defence expenditure. The three largest producers UK, France, Germany, represent approximately 80% of defence equipment expenditure.

How does the Commission propose in the Green Paper to take the debate forward? What possible initiatives does it identify and how do they differ?

The Commission identifies in the Green Paper two possible initiatives: a Communication clarifying the existing legal framework and a new Directive establishing specific rules taking into account the sector’s characteristics.

By definition, a Communication could only stick to existing law. A Communication is adopted by the Commission under its own sole responsibility and without the involvement of the other EU institutions.

A Communication could therefore take into account the existing legal framework, plus recent developments in the relevant case law of the Court of Justice, and clarify that legal framework by announcing the way the Commission would interpret and apply it in the future. As for the content, a Communication would provide criteria to be used in order to establish more clearly when the conditions for the application of Article 296 of the EC Treaty – allowing for defence contracts to be exempted from general public procurement law – are met and when they are not. In the latter case, normal procurement rules would be applicable.

A Directive, on the other hand, would need to be adopted by the other EU institutions and would constitute new law to be applied throughout the EU. The exemption provided for in Article 296 would remain fully applicable, according to the same conditions as today. But a Directive could establish specific and more appropriate (more flexible) rules for the award of contracts which are not covered by the exemption, and which today should be awarded on the basis of the existing “civil” procurement Directives. It could also improve the classification of contracts, on the basis of different possibilities on which the Green Paper aims to stimulate discussion: a general definition of the categories of military equipment covered by the Directive and/or a list of such categories.

If there were to be a Directive on the lines identified in the Green Paper, how would it differ from the existing general public procurement Directives?

The potential advantage of a new Directive is precisely that it would take into account the specific nature of the defence sector and introduce greater flexibility suitable for that sector. Transparency and non-discrimination would remain the cornerstone of the new regime, just as they are the basis for the general procurement Directives. But a special set of rules to be defined with Member States could be envisaged including:
--wider information on the relevant defence contracts through a centralised system of publication
--general use of the negotiated procedure (which would allow contracting authorities, after a call for tenders, to consult and negotiate contract terms with the selected companies)
--scope for contracting authorities to use the negotiated procedure without the prior publication of a tender notice, in certain defined cases
--new specific selection criteria to be applied in assessing tenders, such as confidentiality and security of supply.

Is there a link between the tasks of the European Defence Agency and the debate the Green Paper seeks to set in train?

The Commission is closely associated with the work of the Agency. The Agency’s tasks cover mainly the development of military capability and armaments, which are areas for which Member States are solely responsible. But the Agency also has roles - in research and technology, the defence industry and markets - which interact with Commission competences. The Joint Action establishing the Agency indicates that the Agency “should fulfil its missions in full respect of the competences of the European Community”.

As far as market issues are concerned, the Commission is willing to cooperate and coordinate its efforts with the Agency. Administrative arrangements will be established to ensure efficient working relations, in particular with a view to exchanging expertise and advice in areas of common interest.

What would be the impact on the transatlantic defence market of more open defence procurement at EU level, especially via a possible Directive?

The US defence budget is more than twice the combined defence budget of the EU 25 Member States. The US allocates four times as much resources as the EU to military research, development and procurement and eight times as much to research and technology. Moreover, US companies already play an important role in European markets, the value of US exports to Europe is much higher than European exports to the US, and American investors have bought up a quite significant number of European defence companies.

In any event, the possible EU initiatives referred to in the Green Paper would aim to foster intra-European rather than international competition. A possible Directive would not automatically lead to an opening up of international defence markets. International trade markets will remain governed by WTO rules which provide under article 23 of the Government Procurement Agreement that defence products are excluded. In consequence, Member States will still have the possibility, as is the case today, to buy their defence equipment from tenderers – such as US companies - not established in the EU or to decline to do so. The opening-up of the defence market between the EU and non-EU countries could only be discussed in international negotiations if the interested parties so wished.

As for companies established in the EU but with US capital, they would be able to participate in calls for tender organised in EU Member States, under the same conditions as their European competitors. This means that they would also have to fulfil the same selection criteria, in particular security of supply and confidentiality.

In any case, the increased competition in European defence industries which would result from a more open intra-EU market will render those EU industries more suitable for partnerships with the US. There is an increasing need to share the huge development costs of new systems and this has already driven European and American firms into partnerships.